When deciding whether your assets are low enough to make you eligible for Medicaid coverage, Medicaid will consider your 401(k) account balances to the extent those funds are actually, currently
available to you. The rules of 401(k) accounts can be quite different -- some 401(k)s place time or age restrictions on how much you can withdraw. Medicaid considers as assets all funds you are eligible to withdraw as of the date you apply for Medicaid. However, Medicaid does not consider amounts you may be entitled to withdraw in the future.
For eligibility purposes, Medicaid does not consider tax implications when deciding whether some 401(k) amounts are available to you. In other words, the fact that you might have to pay higher taxes on amounts you withdraw now -- as opposed to waiting to withdraw them later -- doesn't mean those funds are not available to you under Medicaid rules. If you can legally withdraw the funds, Medicaid will count them as part of your current assets even though you will pay a tax penalty for withdrawing them. If the amount of available 401(k) funds puts your total assets over your state's asset limit for Medicaid eligibility, you will have to spend those or other funds until your total assets are spent down to the Medicaid eligibility asset limit.